Mike is dying of AIDS and knows it, but does not tell his agent when applying for life insurance. The contract is issued and Mike dies three years later, at which time the insurer learns of Mike's condition. In this case the insurer must:

Question

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In this scenario, the insurer is obligated to pay the face value of the policy to the beneficiary. This is because most life insurance policies have a contestability period, typically two years, during which the insurer can challenge the validity of the policy based on misrepresentations or omissions by the insured. Since Mike died three years after the policy was issued, beyond the typical contestability period, the insurer must honor the policy despite the initial nondisclosure of Mike's AIDS condition.

Mike Is Dying of AIDS and Knows It, but Does